hayes-ed3-2014-ch-01 International Auditing Overview.pdf

Audit

1. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.1
Principles of Auditing: An Introduction to
International Standards on Auditing
Chapter 1 –International Auditing
Overview
Rick Hayes, Hans Gortemaker
and Philip Wallage

2. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.2
Historical background
•Records of auditing activity in cuneiform in
early Mesopotamian times (around 3,000
BC).
•Ancient China, Greece and Rome.
–The Latin meaning of the word ‘auditor’ was a
‘hearer or listener’ because in Rome auditors
heard taxpayers.
Modern auditing dates to beginning of the
modern corporation.

3. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.3
Brief history of auditing
•The attitude of profit maximisation from the
end of Middle Ages –merchant houses in
Italy.
•Double-entry bookkeeping was first described
in Italy (Pacioli 1496).
•Industrial Revolution Great Britain 1780 lead
to the emergence of large industrial
companies.
•In 1853, the Society of Accountants in
Edinburgh was founded.

4. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.4
The auditor, corporations and financial
information
Investors and creditors may have different
objectives than management (e.g. management
prefers higher salaries and benefits (expenses),
whereas investors wish higher profits and
dividends). Investors and creditors must depend
on fair reporting of the financial statements. To
give them confidence in the financial statements,
an auditorprovides an independent and expert
opinion on the fairness of the reports, called an
audit opinion.

5. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.5
The financial statements are the responsibility of
management and the auditor’s responsibility is to
lend them credibility. By the audit process, the
auditor enhances the usefulness and the value
of the financial statements, but he also increases
the credibility of other non-audited information
released by management.
Auditor and management responsibility for
financial statements

6. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.6
The expectations of auditors
The importance of the company as a potential generator of
wealth is increasingly understood, and so is the impact that a
company’s activities have on society and the environment.
Public expectations go further and include questions such as:
•Is the company a going concern?
•Is it free of fraud?
•Is it managed properly?
•Is there integrity in its database?
•Do directors have proper and adequate information
to make decisions?
•Are there adequate controls?
•What effect do the company’s products and
by-products have on the environment?
•Can an ‘unfortunate mistake’ bring this company to its knees?

7. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.7
International Financial Reporting Standards
•International Financial Reporting Standards (IFRS)
are the standards that are applied for financial
accounting.
–Now used by all foreign registered SEC firms
–IFRS were formerly called International on Accounting
Standards (IAS).
•The International Accounting Standards Board
(IASB) has accounting standard setting
responsibilities for IFRS.
–The EU has agreed to apply most of the IFRS from
2005.
–US to apply to foreign firms now and all SEC traded in
the future.

8. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.8
Auditing standards and regulation are
rapidly changing

9. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.9
International Auditing and Assurance
Standards Board (IAASB) issues:
International Standards on Auditing (ISAs) as the standards to
be applied by auditors in reporting on historical financial
information.
International Standards on Assurance Engagements (ISAEs) as
the standards to be applied by practitioners in assurance
engagements dealing with information other than historical
financial information.
International Standards on Quality Control (ISQCs) as the
standards to be applied for all services falling under the
Standards of the IAASB.
International Standards on Related Services (ISRSs) as the
standards to be applied on related services, as it considers
appropriate.
International Standards on Review Engagements (ISREs) as
the standards to be applied to the review of historical financial
information.

10. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.10
US GAAS for private companies and ISA
now the same
As part of the redrafting, the US Audit Standards
Board converged the clarified standards with
those issued by the International Auditing and
Assurance Standards Board. All but one of the
new standards are effective for engagements
beginning on or after December 15, 2012.

11. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.11
Jurisdictions using clarified ISAs already, or committed to using them in the near
future (86)
Europe (33): Albania, Armenia, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic,
Denmark, Estonia, Finland, France (Experts Comptables), Georgia, Greece, Hungary,
Iceland, Ireland, Kosovo, Latvia, Lithuania, Luxembourg, Malta, Moldova, Netherlands,
Norway, Romania, Serbia, Slovakia, Slovenia, Sweden, Switzerland, Turkey, Ukraine,
United Kingdom.
Americas (17): Argentina, Bahamas, Barbados, Brazil, Canada, Cayman Islands, Chile,
Costa Rica, El Salvador, Guyana, Jamaica, Mexico, Panama, Puerto Rico (private
companies), Trinidad and Tobago, Uruguay, USA (private companies).
Asia Pacific (18):Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan,
Kazakhstan, Malaysia, Mongolia, Nepal, New Zealand, Pakistan, Philippines, Singapore,
South Korea, Sri Lanka, Thailand.
Africa/Middle East (18): Botswana, Ghana, Kenya, Lebanon, Lesotho, Malawi, Mauritius,
Namibia, Rwanda, Sierra Leone, South Africa, Swaziland, Tanzania, Tunisia, Uganda,
United Arab Emirates (Abu Dhabi and Dubai), Zambia, Zimbabwe.

12. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.12
ISAs
100–999 International Standards on Auditing (ISAs)
100–199 Introductory Matters
120 Framework of International Standards on Auditing
200–299 General Principles And Responsibilities
200 Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with International
Standards on Auditing
210 Agreeing the Terms of Audit Engagements
220 Quality Control for an Audit of Financial Statements
230 Audit Documentation

13. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.13
240 The Auditor’s Responsibilities Relating to Fraud in an
Audit of Financial Statements
250 Consideration of Laws and Regulations in an Audit of Financial
Statements
260 Communication with Those Charged with Governance
265 Communicating Deficiencies in Internal Control to Those Charged
with Governance and Management
300–499 Risk Assessment And Response To Assessed Risks
300 Planning an Audit of Financial Statements
315 Identifying and Assessing the Risks of Material Misstatement
through understanding the Entity and Its Environment
320 Materiality in Planning and Performing an Audit
330 The Auditor’s Responses to Assessed Risks
ISAs (Continued)

14. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.14
402 Audit Considerations Relating to an Entity Using a
Service Organisation
450 Evaluation of Misstatements Identified during the Audit
500–599 Audit Evidence
500 Audit Evidence
501 Audit Evidence –Specific Considerations for Selected
Items
505 External Confirmations
510 Initial Audit Engagements –Opening Balances
520 Analytical Procedures
530 Audit Sampling
ISAs (Continued)

15. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.15
540 Auditing Accounting Estimates, Including Fair Value
Accounting Estimates, and Related Disclosures
550 Related Parties
560 Subsequent Events
570 Going Concern
580 Written Representations
600–699 Using the Work Of Others
600 Special Considerations –Audits of Group Financial
Statements (Including the Work of Competent Auditors)
610 Using the Work of Internal Auditors
620 Using the Work of an Auditor’s Expert
700–799 Audit Conclusions And Reporting
700 Forming an Opinion and Reporting on Financial
Statements
ISAs (Continued)

16. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.16
705 Modifications to the Opinion in the Independent Auditor’s
Report
706 Emphasis of Matter Paragraphs and Other Matter Paragraphs
in the Independent Auditor’s Report
710 Comparative Information –Corresponding Figures and
Comparative Financial Statements
720 The Auditor’s Responsibilities Relating to Other Information in
Documents Containing Audited Financial Statements
800–899 Specialised Areas
800 Special Considerations –Audits of Financial Statements
Prepared in Accordance with Special Purpose Frameworks
805 Special Considerations –Audits of Single Financial Statements
and Specific Elements Accounts or Items of a Financial Statement
810 Engagements to Report on Summary Financial Statements
International Auditing Practice Notes
IAPN 1000 Special Considerations in Auditing Financial
Instruments
ISAs (Continued)

17. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.17
•2000–2699 International Standards on Review Engagements (ISREs)
•2400 Engagements to Review Financial Statements (Previously ISA 910)
•2410 Review of Interim Financial Information Performed by the Independent
Auditor of the Entity
•3000–3699 International Standards on Assurance Engagements (ISAEs)
•3000 Assurance Engagements Other than Audits or Reviews of Historical
Financial Information
•3400 The Examination of Prospective Financial Information (Previously ISA
810)
•3402, Assurance Reports on Controls at a Third Party Service Organisation
•4000–4699 International Standards on Related Services (ISRSs)
•4400 Engagements to Perform Agreed-upon Procedures Regarding Financial
Information (Previously ISA 920)
•4410 Engagements to Compile Financial Information (Previously ISA 930)
ISAE
ISRE
ISRS

18. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.18
Audit definition
‘An audit is a systematic process of objectively
obtaining and evaluating evidence regarding
assertions about economic actions and events to
ascertain the degree of correspondence between
these assertions and established criteria and
communicating the results to interested users’.
American Accounting Association

19. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.19
Requirements of a financial statement audit
ISA 200 gives requirements relating to an audit of financial
statements.
•The auditor is required to comply with relevant ethical
requirements, including those pertaining to independence.
•The auditor shall plan and perform an audit with
professional scepticismrecognising that circumstances
may exist that cause the financial statements to be
materially misstated.
•The auditor shall exercise professional judgementin
planning and performing an audit of financial statements.
•To obtain reasonable assurance, the auditor must obtain
sufficient appropriate audit evidenceto reduce audit
risk to an acceptably low level and thereby enable the
auditor to draw reasonable conclusions on which to base
the auditor’s opinion.

20. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.20
Key definitions
•Professional scepticism –An attitude that includes a questioning
mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of
evidence.
•Material misstatement –A significant mistake in financial
information which would arise from errors and fraud if it could
influence the economic decisions of users taken on the basis of
the financial statements.
•Professional judgement –The application of relevant training,
knowledge and experience, within the context provided by
auditing, accounting and ethical standards, in making informed
decisions about the courses of action that are appropriate in the
circumstances of the audit engagement.
•Sufficient appropriate audit evidence –Sufficiencyis the measure
of the quantity (amount) of audit evidence. Appropriateness is the
measure of the quality of audit evidence and its relevance to a
particular assertion and its reliability.

21. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.21
ISA 200 states the overall objectives of an audit of
financial statements are:
1.to obtain reasonable assurance about whether the
financial statements as a whole are free from
material misstatement, whether due to fraud or
error, thereby enabling the auditor to express an
opinion on whether the financial statements are
prepared, in all material respects, in accordance
with an applicable financial reporting framework;
2.to report on the financial statements, and
communicate as required by the ISAs, in
accordance with the auditor’s findings.
Terms used ‘give a true and fair view’ or ‘present
fairly, in all material respects’are equivalent terms.

22. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.22
Management is responsible for financial
statements, internal controls, etc.
An audit in accordance with ISAs is conducted on
the premise that management and those charged
withgovernance have acknowledged certain
responsibilities that are fundamental tothe
conduct of the audit, such as financial statements,
accounting methods and internal control.

23. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.23
•The concept of materialityis applied by the auditor
both in planning and performing the audit, and in
evaluating the effect of identified misstatements on
the audit and the financial statements.
•Misstatements, including omissions, are considered
to be material if, individually or in the aggregate, they
could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
•Judgements about materiality are made in the light of
surrounding circumstances, and are affected by the
auditor’s perception of the financial information needs
of users of the financial statements, and by the size or
nature of a misstatement, or a combination of both.

24. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.24
•Certain inherent limitations in an audit affect the
auditor’s ability to detect material misstatements.
•Test and sampling
•Internal control
•Audit evidence
•Audit process permeated by judgement.
•Risk
•Overall financial statements may be misstated,
usually caused by poor control environment.
•Misstatement in relation to classes of transactions,
account balances and disclosures.
Inherent limitations in an audit of
financial statements

25. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.25
Types of audit
Audit of financial statements
Examine financial statements, determine if they give
a true and fair view or fairly present the financial
statements.
Operational Audit
A study of a specific unit of an organisation for the
purpose of measuring its performance.
Compliance Audit
A review of an organisation’s procedures and
financial records performed to determine whether the
organisation is following specific procedures, rules or
regulations set out by some higher authority.

26. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.26
Types of auditors
•Internal auditors are employed by individual
companies to investigate and appraise the
effectiveness of company operations for
management.
•Independent auditors are typically certified
either by a professional organisation or a
government agency.

27. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.27
Certification of the auditor
•Certified Public Accountant (CPA)
•Chartered Accountant (CA)
•Contador Público (CP)
•Other.

28. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.28
Management assertions and audit objectives
•The audit starts with the financial statements
prepared by the client and the claims or
‘assertions’ that the client makes about these
numbers.
•It is the auditor’s job to validate management’s
assertions. In order to do so, the auditor will
identify audit objectives, which can be regarded
as the auditor’s counterpart of management
assertions.

29. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.29
Management assertions
Management assertions are implied or expressed
representations by management about classes of
transactions and related accounts in the financial
statements. An example of a management
assertion is that ‘the company’s financial
statements are prepared based on international
accounting standards’.

30. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.30
Assertions about classes of transactions
and events for the period under audit
•Occurrence–Transactionandeventsthathavebeen
recordedhaveoccurredandpertaintotheentity.
•Completeness–Alltransactionsandeventsthat
shouldhavebeenrecorded.
•Accuracy–Amounts and other data relating to
recorded transactions and events have been
recorded appropriately.
•Cut-off–Transactions and events have been
recorded in the correct accounting period.
•Classification–Transactions and events have been
recorded in the proper accounts.

31. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.31
Assertions about account balances at
the period end
•Existence–Assets, liabilities and equity interests
exist.
•Rights and obligations–The entity holds or controls
the rights to assets, and liabilities are the obligations
of the entity.
•Completeness–All assets, liabilities and equity
interests that should have been recorded have been
recorded.
•Valuation and allocation–Assets, liabilities and
equity interests are included in the financial
statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately
recorded.

32. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.32
Assertions about presentation and
disclosure
•Occurrence and rights and obligations –Disclosed
events, transactions and other matters have occurred
and pertain to the entity.
•Completeness–All disclosures that should have
been included in the financial statements have been
included.
•Classification and understandability–Financial
information is appropriately presented and described,
and disclosures are clearly expressed.
•Accuracy and valuation–Financial and other
information are disclosed fairly and at appropriate
amounts.

33. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.33
Audit process model
•Phase I –Client acceptance
•Phase II –Planning
•Phase III –Testing and evidence
•Phase IV –Evaluation and Judgement.

34. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.34
Phase I Client acceptance
Objective: The client acceptance phase of the audit
plan, Phase I, involves deciding whether to accept
a new client or continue with an existing one.
Procedures:(1)Evaluate the client’s background
and reasons for the audit; (2)determine whether
the auditor is able to meet the ethical requirements
regarding the client; (3) determine need for other
professionals;(4)communicate with predecessor
auditor; (5)prepare client proposal; (6)select staff
to perform the audit; and (7)obtain an engagement
letter.

35. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.35
Phase II Planning the audit
Objective: Determine the amount and type of
evidence and review required to give the auditor
assurance that there is no material misstatement of
the financial statements.
Procedures: (1) Perform audit procedures to
understand the entity and its environment, including
the entity’s internal control; (2) assess the risks of
material misstatements of the financial statements;
(3) determine materiality; and (4) prepare the
planning memorandum and audit programme,
containing the auditor’s response to the identified
risks.

36. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.36
Objective: Test for evidence supporting internal
controls and the fairness of the financial
statements.
Procedures: (1) Tests of controls;
(2) substantive tests of transactions;
(3) analytical procedures; (4) tests of details of
balances; and (5) search for unrecorded liabilities.
Phase III Testing and evidence

37. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.37
Phase IV Evaluation and reporting
Objective: Complete the audit procedures and
issue an opinion.
Procedures:(1) Evaluate governance evidence; (2)
perform procedures to identify subsequent events;
(3) review financial statements and other report
material; (4) perform wrap-up procedures; (5)
prepare Matters of Attention for Partners; (6) report
to the board of directors; and (7) prepare audit
report.

38. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.38
International audit firms
‘The Big Four’:
Deloitte & Touche; KPMG;
PricewaterhouseCoopers; Ernst & Young
Audit staff
Staff Accountants (or Junior Assistants then
Senior)
Senior Accountants (or Supervisor)
Managers
Partners/Directors

39. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.39
Illustration 1.7 The Organisational Hierarchy of a Typical International Auditing Firm

40. Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3
rd
edition © Pearson Education Limited 2014
Slide 1.40
Thank you for your attention
Any Questions?